Friday, November 10, 2023

Weekly Commentary: A Most Critical Stage

I prefer not to refer to old CBBs. I’m making an exception this week, extracting from the February 6, 2009, edition. In “Government Finance Bubble,” I offered my first warning of dangerous unfolding Bubble dynamics.

“The Government Finance Bubble is enormous and powerful - and should be anything but underestimated. Akin to the previous Bubble in Wall Street finance, the epicenter of this Bubble is here in the U.S. But I would argue that this unfolding Bubble dynamic has greater potential to engulf the entire world than even U.S.-style mortgages and derivatives did starting back around 2002. Welcome to the new world of synchronized stimulus, deficits, and reflationary policymaking.”

“It is imperative for policymakers to ensure that the Government Finance Bubble does not follow in the footsteps of the runaway excess associated with Wall Street/mortgage finance. Yet it’s clear that policymaking (monetary and fiscal) is setting a course to guarantee just such an outcome. And, as has been the case for some time now, markets are keen to fall in love with – and aggressively accommodate – whatever might be the Bubble of the Day.”

I never imagined in February 2009 that the Fed’s balance sheet (less than $900bn to begin ‘08) would inflate from that February’s $2.2 TN to $9.0 TN, or that Treasury liabilities would more than triple from $9.5 TN to $30.4 TN - as Agency Securities ballooned another 50% to $12.0 TN. I expected rapid growth from China’s banking system, but to inflate from $9.0 TN to $56 TN was not something I thought possible. The same can be said for Bank of Japan assets that inflated six-fold to surpassed $6.8 TN, or the ECB’s balance sheet that inflated five times to almost $9.0 TN.

I’ve referred to the “global government finance Bubble” as the “granddaddy of Bubbles.” It originated from aggressive reflationary policymaking following the collapse of the mortgage/Wall Street finance Bubble, a historic Bubble that itself had inflated from post-“tech” Bubble reflationary measures.

I’m repeating this analytical framework to reinforce a critical point: We’ve reached the end of the line. There’s no bigger Bubble waiting in the wings for post-government finance Bubble reflation. This ensures that Bubble collapse comes with momentous consequences. And these risks today place tremendous pressure on fiscal and monetary policymakers to perpetuate the excess necessary to hold Bubble collapse at bay.

Further core Bubble theory bears rehashing. A Bubble financed by an expansion of high-risk credit (i.e., junk bonds) poses minimal systemic risk. Why? Because such a bubble will be relatively short-lived. When things start to get crazy, the holders of junk debt will invariably reach their risk tolerance threshold. “I’ve got enough. No more junk!” And this will bring the bubble to its conclusion before it has had years to inflict deep structural damage.

Bubbles fueled by money-like instruments function altogether differently. Money is something we trust for its attributes of safety and liquidity. Unlike junk debt, there’s no point where we say “No thanks. I’ve got enough money.” And it’s this insatiable demand that creates the ultimate fuel for protracted Bubbles and deep structural maladjustment. Incredibly, this historic Bubble - inflating at the heart of system finance - is now into its 15th year.

From a purely analytical standpoint, it’s all fascinating. Bubble analysis was some years ago completely discredited. Stock market “investors” are convinced nothing can get in the way of equities prices invariably marching ever higher. There’s been some bond market pain, but fears of runaway deficits and a crisis of confidence have not materialized.

Peering beyond the financial markets to the real world, something clearly has gone terribly wrong. To those of us who believe sound money and Credit are the bedrock for healthy households, communities, societies, governments and global relations, there is powerful evidence of deleterious effects from decades of inflationism and Monetary Disorder.

The global government finance Bubble is at A Most Critical Stage. Bubbles are faltering, though with diverse symptoms and dynamics.

November 6 – Reuters (Tom Westbrook): “China’s attempts to keep the yuan from falling contributed to last week’s chaos in money markets, sources involved say… Routine month-end demand for cash in China's banking system snowballed into a scramble on Oct. 31 that pushed short-term funding rates as high as 50% in some cases, an incident that authorities are now investigating… The contributing factors were the usual month-end demand for liquidity, cash hoarding in the lead up to a big government bond sale and a market where the biggest banks were already reticent to lend because of a mandate to counter pressure on the yuan. ‘It was an accident,’ said Xia Chun, chief economist at wealth manager Yintech Investment Holdings, calling it an unforeseen consequence of the government’s heavy hand in financial markets.”

It's at the stage where ongoing double-digit Chinese Credit growth is required to hold Bubble collapse at bay. Apartment Bubble deflation continues to gain momentum, with contagion increasingly impacting the vulnerable local government sector. The outlets for sufficient (to perpetuate Bubbles) system Credit expansion have narrowed. This backdrop has Beijing placing tremendous pressure on an already bloated banking system to expand lending and bond purchases, including for troubled housing and government sectors.

Breakneck growth of unsound late-cycle Credit is the kiss of death for a vulnerable currency. Aggressive People’s Bank of China (PBOC) liquidity injections further undermine currency stability. Today, Beijing faces the perilous challenge of holding the forces of Bubble collapse in check without undermining confidence in China’s banking system and currency. Moreover, China’s dire predicament is compounded by Xi Jinping’s zealous global superpower ambitions. The weight of the entire Chinese Credit system rests on the assumption that Beijing can continue to circumvent Bubble collapse.

November 9 – Financial Times (Martin Wolf and Kana Inagaki): “The Bank of Japan will proceed carefully with raising interest rates to avoid bond market volatility and any adverse impact on financial institutions, its governor has said, warning that unwinding the central bank’s ultra-loose monetary policy will be a ‘serious challenge’. Kazuo Ueda told the Financial Times Global Boardroom conference that the central bank was making progress towards hitting its 2% inflation target but cautioned that it was still ‘too early’ to determine the sequence of its policy normalisation. ‘When we normalise short-term interest rates, we will have to be careful about what will happen to financial institutions, what will happen to borrowers of money in general and what will happen to aggregate demand,’ Ueda said. ‘It is going to be a serious challenge for us.’”

Bank of Japan (BOJ) Governor Kazuo Ueda has no coherent strategy for exiting Japan’s historic inflationary experiment. A negative policy rate in today’s world of significant inflation and central bank tightening undermine Japan’s currency. Meanwhile, artificially low yields and BOJ bond purchases (forecast to reach $860bn this year!) associated with an untenable YCC (yield curve control) policy further subvert yen stability.

How great are the excesses that have accumulated in the most recent eight years of misguided BOJ inflationary policies? How much has been borrowed in Japan to finance global leveraged speculation? How much Japanese investor and institutional funds have flowed to higher yielding global instruments and markets? Importantly, BOJ policies, instrumental in global government finance Bubble inflation, have turned untenable.

Chinese and Japanese government-dominated Credit systems today still retain moneyness. But ongoing egregious government finance Bubble excess increasingly risks crises of confidence in the renminbi and yen. Both governments are trapped in Bubble Dynamics, unwilling to face the consequences of retreating from precariously flawed inflationary policy regimes. Further delays guarantee only greater imbalances and maladjustment, along with highly destabilizing adjustment periods. Disorderly currency devaluation can unleash global de-risking/deleveraging.

The U.S. predicament is different, but similarly perilous. One key difference, the dollar is for now underpinned by the serious fragilities in China, Japan, and EM, along with latent euro frailty.

It is important to appreciate the ramifications for a U.S. Credit system so dominated by government finance (i.e., Treasuries, Agency Securities, and Fed Credit). There have been profound changes in system function compared to previous mortgage finance and “tech” Bubble periods. Previous Bubbles saw Credit risk accumulate over years, only to go to parabolic extremes during “Terminal Phase” excess. Inevitable risk aversion and resulting Credit tightening triggered Bubble deflation and problematic Credit, market and economic down cycles.

The ongoing government finance Bubble inherently enjoys significant immunity to risk aversion and traditional Credit dynamics. Insatiable demand accommodated $2 TN of federal deficit spending the past year. Unlike late-stage mortgage Bubble excess, government Credit doesn’t require heavy financial intermediation through the banking system, Wall Street securitizations or derivatives markets. And such massive government debt growth underpins incomes and corporate earnings, bolstering system-wide Credit. What's more, years of government sector liability expansion (Treasury and Federal Reserve) created unprecedented gains in household and corporate sectors cash and bond holdings (along with inflated equities and real estate).

That government finance Bubble dynamics work to minimize Credit and intermediation risks is a major factor in what appears robust and resilient market and economic dynamics. Stated differently, the certainty and relative stability of system Credit growth underpins confidence, risk-taking, asset prices, and economic activity.

Yet this aberrant financial structure suffers from a crucial weak link: These dynamics come with momentous liquidity risk. For one, moneyness attributes associated with the largest and perceived safest and most liquid securities (Treasuries and Agencies) market in the world become a magnet for leveraged speculation. For example, why speculate in wild and woolly high-yielding subprime mortgage derivatives when leveraging Treasury and Agency securities is so lucrative? And the more perilously this market inflates, the more confident the marketplace becomes in the Federal Reserve liquidity backstop.

Clearly, the leveraged speculating community was emboldened by the September 2019 QE restart. Any doubts as to how far the Fed would be willing to go to backstop marketplace liquidity were allayed with measures taken in March 2020 – that would see the Fed’s balance sheet inflate an unprecedented $5.0 TN. And fear that inflation and the Fed’s tightening cycle might inhibit Federal Reserve backstop measures were allayed with the hasty $700 billion (Fed and FHLB) liquidity injection in response to the outbreak of bank runs this past March.

Importantly, liquidity backstop distortions for a marketplace in the throes of historic Bubble inflation come with momentous ramifications. Ponder a few data points. Outstanding Treasury Securities have ballooned $21.7 TN, or 360%, since the end of 2007. Over the past four years, combined Treasury and Agency securities have ballooned $12.6 TN, or 47%, to almost $40 TN. Such phenomenal Credit expansion is possible only with the perception of a “whatever it takes” liquidity backstop.

I would further argue that this liquidity backstop and resulting boom of perceived safe Credit have been instrumental in bolstering - and now sustaining - inflationary pressures. While the Fed sought to tighten with rate policy, the liquidity backstop thwarted a general tightening of financial conditions.

Importantly, with Fed rate hikes ensuring higher market yields (lower bond prices), leveraged speculation simply shifted to “basis trades,” “carry trades,” and various Credit spreads. Playing the small spread between the Treasury/Agency cash markets and futures contracts was pretty much free money. And why not short Treasuries and use those proceeds to speculate in higher-yielding corporate debt, CDOs (collateralized debt obligations), leveraged loans and such.

Why not borrow for free in a devaluing Japanese yen, using proceeds to leverage in higher-yielding instruments in the U.S. and elsewhere. And with the Fed certain to respond quickly to system liquidity issues, why not leverage in size (“basis trades” 50-100 times levered)?

The upshot of all this leveraging has been a massively inflating pool of speculative finance. This powerful fuel for sustaining Bubbles has also fomented volatility and general instability. On the one hand, the near certainty of ongoing enormous growth of money-like Credit - underpinned by the Fed’s open-ended liquidity backstop - creates an extraordinarily robust financial structure. On the other hand, such incredible inflation of perceived safe Credit coupled with unprecedented leveraged speculation is one historic accident in the making.

Why would the VIX (equities volatility) Index trade at only 14 in the face of such an unstable and risky world? Because of the massive pool of speculative finance, and the view that short-term risks are low for de-risking/deleveraging to spark an accident.

The Nasdaq100 jumped 2.8% this week, increasing y-t-d gains to 42.0%. It’s worth noting that high yield CDS prices dropped a further 28 bps this week, with the two-week 91 bps collapse the largest in over a year. The 13 bps two-week decline in investment-grade CDS was also the biggest in a year. And while the bond market indicated ongoing vulnerability this week (two-year Treasury yields up 22 bps and MBS yields 19 bps higher), the risk of a loosening of financial conditions is significant. An easing of conditions will only allow inflation to take even deeper root.

Surely cognizant of his role in promoting looser conditions last week, the Fed Chair tried to make amends.

November 8 – Financial Times (Colby Smith): “Federal Reserve chair Jay Powell has warned the US central bank against the risk of being ‘misled’ by good data on prices, saying the mission to return inflation to its 2% target had a ‘long way to go’. Speaking at an IMF event…, the Fed chair said officials were ‘gratified’ by the retreat in price pressures, but stopped short of sounding the all-clear on an inflation problem that has proved more persistent than policymakers expected. ‘We know that ongoing progress toward our 2% goal is not assured: inflation has given us a few head fakes… If it becomes appropriate to tighten policy further, we will not hesitate to do so.’”

At this point, the markets are confident that the Fed will not press rate increases to the point of sparking tightened conditions. I believe it will require significantly tighter conditions to crush what is now a new cycle of deeply rooted inflationary pressures.

November 8 – Bloomberg (Lulu Yilun Chen and Low De Wei): “Citadel founder Ken Griffin said the world is facing unrest and structural changes that are pushing it toward de-globalization and causing higher baseline inflation that may last ‘for decades.’ ‘The peace dividend is clearly at the end of the road,’ Griffin said… ‘We are likely to see higher real rates and we’re likely to see higher nominal rates.’ The billionaire said that will have implications on the cost of funding the US deficit, saying the government hadn’t counted on higher rates ‘when we went on the spending spree that created a $33 trillion deficit.’”

November 7 – Bloomberg (Austin Weinstein): “US officials will seek to limit access to Federal Home Loan Banks after failing lenders turned to the $1.3 trillion system in desperate bids to survive March’s banking crisis. The Federal Housing Finance Agency will try to push FHLBs back to their roots in housing finance, and away from serving as lenders of last resort to troubled banks, according to a report... The plans would ratchet up federal oversight, and seek to direct banks toward the Federal Reserve’s discount window in times of extreme stress. Banks borrow hundreds of billions of dollars from the government-chartered FHLBs each year to fulfill short-term funding needs. The practice came under scrutiny after the FHLBs, which have implied backing from the government, lent heavily to Silicon Valley Bank, Signature Bank and First Republic Bank as they careened toward failure.”

A pivotal government finance Bubble player is being reined in. While this may not have immediate consequences, the FHLB’s role as a quasi-central bank crisis liquidity provider could be in jeopardy. I am reminded of how accounting scandals at Fannie Mae and Freddie Mac disabled the powerful GSEs, though the full impact was not revealed until they were unable to provide their crucial liquidity functions during the 2008 crisis.

For the Week:

The S&P500 gained 1.3% (up 15.0% y-t-d), and the Dow added 0.7% (up 3.4 %). The Utilities dropped 2.9% (down 16.5%). The Banks fell 2.1% (down 22.7%), and the Broker/Dealers slipped 0.7% (up 6.9%). The Transports dipped 0.6% (up 7.7%). The S&P 400 Midcaps declined 1.6% (up 0.4%), and the small cap Russell 2000 dropped 3.1% (down 3.2%). The Nasdaq100 advanced 2.8% (up 42.0%). The Semiconductors surged 4.0% (up 41.8%). The Biotechs fell 3.3% (down 12.2%). With bullion down $52, the HUI gold equities index sank 7.8% (down 8.7%).

Three-month Treasury bill rates ended the week at 5.2475%. Two-year government yields surged 22 bps this week to 5.06% (up 63bps y-t-d). Five-year T-note yields jumped 18 bps to 4.68% (up 68bps). Ten-year Treasury yields gained eight bps to 4.65% (up 77bps). Long bond yields were unchanged at 4.76% (up 80bps). Benchmark Fannie Mae MBS yields surged 19 bps to 6.40% (up 101bps).

Italian yields increased six bps to 4.58% (down 12bps). Greek 10-year yields added two bps to 3.96% (down 60bps y-t-d). Spain's 10-year yields rose nine bps to 3.77% (up 26bps). German bund yields increased seven bps to 2.72% (up 27bps). French yields gained six bps to 3.30% (up 32bps). The French to German 10-year bond spread narrowed one to 58 bps. U.K. 10-year gilt yields rose five bps to 4.34% (up 66bps). U.K.'s FTSE equities index increased 0.8% (down 1.2% y-t-d).

Japan's Nikkei Equities Index rose 1.9% (up 24.8% y-t-d). Japanese 10-year "JGB" yields dropped eight bps to 0.85% (up 43bps y-t-d). France's CAC40 was little changed (up 8.8%). The German DAX equities index increased 0.3% (up 9.4%). Spain's IBEX 35 equities index gained 0.8% (up 13.9%). Italy's FTSE MIB index slipped 0.6% (up 20.2%). EM equities were mostly higher. Brazil's Bovespa index jumped 2.0% (up 9.9%), while Mexico's Bolsa index was unchanged (up 5.8%). South Korea's Kospi index rose 1.7% (up 7.7%). India's Sensex equities index added 0.8% (up 6.7%). China's Shanghai Exchange Index increased 0.3% (down 1.6%). Turkey's Borsa Istanbul National 100 index gained 0.8% (up 41.1%). Russia's MICEX equities index rose 1.0% (up 50.5%).

Federal Reserve Credit declined $38.8bn last week to $7.822 TN. Fed Credit was down $1.079 TN from the June 22nd, 2022, peak. Over the past 217 weeks, Fed Credit expanded $4.095 TN, or 110%. Fed Credit inflated $5.011 TN, or 178%, over the past 574 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt fell $7.6bn last week to $3.426 TN. "Custody holdings" were up $88bn, or 2.6%, y-o-y.

Total money market fund assets gained $17bn to $5.712 TN, with a 35-week gain of $818bn (25% annualized). Total money funds were up $1.091 TN, or 23.6%, y-o-y.

Total Commercial Paper surged $22.6bn to $1.241 TN. CP was down $55bn, or 4.2%, over the past year.

Freddie Mac 30-year fixed mortgage rates sank 37 bps to 7.35% (up 27bps y-o-y). Fifteen-year rates dropped 28 bps to 6.79% (up 41bps). Five-year hybrid ARM rates fell 18 bps to 7.03% (up 97bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates down three bps to 7.89% (up 105bps).

Currency Watch:

November 5 – Bloomberg: “China’s iron-clad grip on the yuan has reached a level unseen for well over a decade in its daily reference rate, raising the risk of a buildup of currency pressure that may one day have to be released. The People’s Bank of China kept the so-called fixing for the managed currency little changed on Monday… The PBOC has kept such a tight range on the reference rate — its favorite tool for guiding the currency — that a gauge of its swings has collapsed to levels last seen in 2010. Slumps in volatility to similar levels over the past decade have often preceded a sizeable move in the yuan.”

November 6 – Wall Street Journal (Jason Douglas and Weilun Soon): “For years, foreign companies plowed the profits they made in China back into China, using the cash to finance new hiring and investment as its giant economy expanded rapidly. Now… they are pulling those profits out. Foreign firms yanked more than $160 billion in total earnings from China during six successive quarters through the end of September…, an unusually sustained run of profit outflows that shows how much the country’s appeal is waning for foreign capital. The torrent of earnings leaving China pushed overall foreign direct investment in the world’s second-largest economy into the red in the third quarter for the first time in a quarter of a century.”

November 6 – New York Times (Keith Bradsher): “After lending $1.3 trillion to developing countries, mainly for big-ticket infrastructure projects, China has shifted its focus to bailing out many of those same countries from piles of debt. The initial loans were mostly part of the Belt and Road Initiative, which Xi Jinping, China’s top leader, started in 2013 to build stronger transportation, communications and political links in more than 150 countries. But now the two main Chinese state banks that provided most of the infrastructure loans have reduced their new lending. Rescue loans climbed to 58% of China’s lending to low- and middle-income countries in 2021 from 5% in 2013, according to… AidData, a research institute at William and Mary… ‘Beijing is navigating an unfamiliar and uncomfortable role — as the world’s largest official debt collector,’ the institute wrote.”

For the week, the U.S. Dollar Index gained 0.8% to 105.86 (up 2.3% y-t-d). For the week on the upside, the South Korean won increased 0.4%. On the downside, the South African rand declined 2.5%, the Australian dollar 2.3%, the New Zealand dollar 1.8%, the Japanese yen 1.4%, the British pound 1.2%, the Canadian dollar 1.0%, the Mexican peso 1.0%, the Norwegian krone 0.6%, the Singapore dollar 0.5%, the Swiss franc 0.4%, the euro 0.4%, and the Brazilian real 0.1%. The Chinese (onshore) renminbi declined 0.14% versus the dollar (down 5.31%).

Commodities Watch:

The Bloomberg Commodities Index dropped 3.4% (down 9.9% y-t-d). Spot Gold fell 2.6% to $1,940 (up 6.4%). Silver sank 4.1% to $22.27 (down 7.0%). WTI crude dropped $3.34, or 4.1%, to $77.17 (down 4%). Gasoline slipped 0.5% (down 11%), and Natural Gas sank 13.7% to $3.03 (down 32%). Copper fell 2.6% (down 6%). Wheat increased 0.5% (down 27%), while Corn slumped 2.8% (down 32%). Bitcoin gained $2,660, or 7.7%, to $37,370 (up 125%).

Middle East War Watch:

November 6 – Financial Times (James Shotter, Felicia Schwartz, Adam Samson and Donato Paolo Mancini): “Joe Biden on Monday pressed Benjamin Netanyahu to agree to ‘tactical pauses’ in Israel’s war with Hamas as Israeli forces encircled Gaza’s main city and carried out an intense bombardment of the besieged strip. The US president told Israel’s prime minister… that Washington was going to ‘continue to advocate for temporary localised pauses in the fighting’, said John Kirby, US National Security Council spokesperson. ‘This remains something we are actively discussing with our Israeli counterparts and we consider ourselves at the beginning of this conversation, not at the end of it.’”

November 9 – CNN (Haley Britzky and Natasha Bertrand): “Two US F-15 fighter jets conducted an airstrike on a weapons storage facility in eastern Syria used by Iran’s Islamic Revolutionary Guard Corps (IRGC) and affiliated groups… ‘This precision self-defense strike is a response to a series of attacks against U.S. personnel in Iraq and Syria by IRGC-Quds Force affiliates,’ Defense Secretary Lloyd Austin said... ‘The United States is fully prepared to take further necessary measures to protect our people and our facilities,’ he added. ‘We urge against any escalation.’”

November 8 – Reuters (Idrees Ali): “The United States, for the second time in recent weeks, carried out strikes on Wednesday against a weapon storage facility in eastern Syria that the Pentagon said was used by Iran's Islamic Revolutionary Guard Corps (IRGC) and affiliated groups. As tensions soar over the Israel-Hamas conflict, U.S. and coalition troops have been attacked at least 40 times in Iraq and Syria by Iran-backed forces since the start of October. Forty-five U.S. troops have suffered traumatic brain injuries or minor wounds. In a statement, U.S. Defense Secretary Lloyd Austin said the strikes were conducted by two U.S. F-15 fighters and were in response to the recent attacks against U.S. forces. Austin said the attacks against U.S. troops must stop. ‘If attacks by Iran's proxies against U.S. forces continue, we will not hesitate to take further necessary measures to protect our people,’ Austin added.”

November 9 – Reuters (Phil Stewart, Idrees Ali and Ahmed Rasheed): “A defective drone in Iraq may have helped keep America from being dragged deeper into a widening Middle East conflict. The drone, which was launched at the Erbil air base by an Iranian-backed militia before sunrise on Oct. 26, penetrated U.S. air defenses and crashed into the second floor of the barracks housing American troops… But the device laden with explosives failed to detonate… The U.S. had got lucky… The incident was among at least 40 separate drone and rocket attacks that have been launched at U.S. forces by Iranian-backed militias in Iraq and Syria over the past three weeks in response to American support for Israel in the Gaza war…”

November 8 – Reuters (Yomna Ehab and Suleiman al-Khalidi): “Israel carried out an aerial attack targeting military sites in southern Syria leading to some material losses, Syrian state media said…, citing a military source. The source quoted by state media said missiles flying over Lebanon's Baalbek region had targeted several sites…”

November 8 – Reuters (Laila Bassam and Tom Perry): “Powerful Russian anti-ship missiles acquired by Hezbollah give it the means to deliver on its leader's veiled threat against U.S. warships and underline the grave risks of any regional war, sources familiar with the group's arsenal say. Hezbollah leader Sayyed Hassan Nasrallah warned Washington last week his group had something in store for the U.S. vessels deployed to the region since war erupted last month between the Palestinian group Hamas and Israel, shaking the wider Middle East. Two sources in Lebanon familiar with the Iran-backed group's arsenal say he was referring to Hezbollah's greatly enhanced anti-ship missile capabilities, including the Russian-made Yakhont missile with a range of 186 miles.”

November 4 – Politico (Nahal Toosi): “The state of Israel’s conflict with the Palestinians is nearly as old as the United Nations. But it’s hardly ever caused as much havoc at the typically staid institution as it has in the last month. Israeli officials have called for the secretary-general to resign, a top human rights official stepped down with an angry letter invoking ‘genocide,’ and diplomats on a paralyzed U.N. Security Council are upbraiding each other for being too soft on Hamas… The frustration is palpable in Turtle Bay, the New York neighborhood home to the U.N. headquarters, diplomats and officials say. It courses through WhatsApp messages and the corridors. Informal meetings on totally unrelated topics inevitably turn toward the Middle East.”

November 6 – Bloomberg (Arsalan Shahla): “The war between Israel and Hamas is ‘strongly likely’ to spread in the Middle East if ‘Israeli crimes’ continue, Iran Foreign Ministry Spokesman Nasser Kanaani says... Calls on UN to ‘take notice’ of Israeli official’s comments on possibility of using atomic bomb as a threat to international security…”

November 9 – Wall Street Journal (Yaroslav Trofimov): “The bloody war in Gaza is providing America's main geopolitical rivals China and Russia with a valuable opportunity to garner support around the world, enabling the two repressive autocracies to harness a wave of sympathy for the Palestinians and to position themselves as champions of humanitarian values and peace. While both Moscow and Beijing maintained close relations with Israel for decades… the two powers have pointedly declined to criticize Hamas for the Oct. 7 attack on southern Israel that triggered the war.”

Market Instability Watch:

November 8 – Reuters (David Morgan): “Speaker Mike Johnson told key Republican members of the U.S. House of Representatives on Wednesday that he will decide within the next two days on a path to avert a potential government shutdown, according to lawmakers. The Republican-controlled House and Democratic-led Senate have just over a week to agree on a stopgap spending measure to keep federal agencies open after current funding expires on Nov. 17. The House could vote on such a plan on Tuesday, three days before the deadline, according to some lawmakers.”

November 9 – Bloomberg: “Chinese banks have ramped up their borrowing of short-term funds, a sign that fears of a cash crunch still loom large even as Beijing sought to calm traders after a recent liquidity squeeze. Onshore lenders this week doubled their issuance of so-called negotiable certificates of deposit, a form of debt with maturities from one to 12 months, to more than 1 trillion yuan ($137bn). That’s the largest weekly issuance of such debt on record…”

November 6 – Financial Times (Catarina Saraiva): “Federal Reserve Governor Lisa Cook said she is closely monitoring weaknesses at nonbank financial institutions as the central bank’s policy cools the economy and leads to tighter financial conditions. ‘Vulnerabilities at certain NBFIs could play a key role in amplifying stress associated with tightening financial conditions and slowing economic activity,’ Cook said… Cook said risks have risen in financial markets in recent years and pointed to several areas that she is watching, including liquidity mismatches at nonbanks, such as money-market and hedge funds, as well as debt-delinquency rates and Treasury market functioning. Cook specifically noted Treasury cash-futures basis trades, which may have gained in popularity recently. ‘Because the basis trade is often highly leveraged, a funding shock or heightened volatility in Treasury markets could force hedge funds to abruptly unwind their positions at potentially distressed prices,’ Cook said.”

November 8 – Bloomberg (Kate Davidson): “Federal Reserve Governor Lisa Cook said a worsening of geopolitical tensions, including those involving Russia, the Middle East and China, could trigger broad negative spillovers to global markets, including higher inflation. ‘Russia’s ongoing war against Ukraine continues to weigh on many economies in a variety of ways, including sustained disruptions to regional trade in food, energy and other commodities,’ Cook said… ‘The conflict in the Middle East could generate further risks to energy and financial markets, as well as a worsening of global humanitarian and migration challenges,’ she added.”

November 6 – Bloomberg (Ruth Carson and David Finnerty): “Hedge funds extended short positions on Treasuries to a record just before smaller-than-expected US bond sales and weaker jobs data spurred a rally. Leveraged funds ramped up net short Treasury futures positions to the most in data going back to 2006, according to… the latest Commodity Futures Trading Commission figures... The bets persisted even though the cash bonds had rallied the week before. ‘It feels like short US Treasuries positioning was at an extreme last week, which was an accident waiting to happen,’ said Gareth Berry, strategist at Macquarie Group…”

November 8 – Bloomberg (Alexandra Semenova and Denitsa Tsekova): “US Treasury auctions are exerting a growing sway over stocks, underscoring how the path of interest rates is gripping markets of late. That’s the take from Citigroup Inc. data showing that the S&P 500 Index has moved about 1% in either direction on auction days since the start of 2022, eclipsing the prior decade’s average. Of the 22 sales analyzed, all of 30-year bonds, subsequent moves in stocks were bigger than for monthly payrolls data – which traders typically sweat over to assess the health of the economy and Federal Reserve policy. Ten-year auctions produced a similar result, according to the study, led by Stuart Kaiser, Citigroup’s head of US equity trading strategy.”

November 9 – Bloomberg (Garfield Reynolds): “Rates traders are betting that the steepest global tightening cycle in a generation is over and that monetary easing will begin from mid-2024. Swaps signal the average cash rate for developed economies will be steady over the coming six months, the first time in two years that they’re not pricing in a hike over that time frame… They also show a 50-bps reduction in the aggregated rate within a year, the biggest bet on easing since the pandemic.”

November 9 – Bloomberg (Alexandra Harris): “A push by US regulators to rein in the Federal Home Loan Banks risks casting broad ripples through the US financial system, increasing costs to banks by pulling a major force from the nation’s funding markets. That’s a key takeaway from Wall Street strategists after the Federal Housing Finance Agency released a report this week that called for limiting access to loans from the banks.”

November 7 – Bloomberg (Ruth Carson and Mark Cudmore): “US Treasuries may face renewed selling pressure into the new year if one measure of the nation’s swelling debt repayment bill is any guide. Estimated annualized interest payments on the US government debt pile climbed past $1 trillion at the end of last month, Bloomberg analysis shows. That projected amount has doubled in the past 19 months from the equivalent figure forecast around the time… ‘There will be further increases to Treasury coupon auctions and T-bills outstanding going forward,’ Bloomberg Intelligence strategists Ira Jersey and Will Hoffman wrote... ‘Besides deficits of over $2 trillion in the foreseeable future, climbing maturities following the increase of issuance from March 2020 will also need to be refinanced.’”

November 10 – Reuters (Pete Schroeder and Zeba Siddiqui): “The Industrial and Commercial Bank of China's (ICBC) U.S. arm was hit by a ransomware attack that disrupted trades in the U.S. Treasury market on Thursday, the latest in a string of victims ransom-demanding hackers have claimed this year. ICBC Financial Services, the U.S. unit of China's largest commercial lender by assets, said it was investigating the attack that disrupted some of its systems, and making progress toward recovering from it.”

Bubble and Mania Watch:

November 8 – Bloomberg (Yumi Teso and Masaki Kondo): “Japanese investors bought the most US sovereign bonds in six months in September, underscoring fund flows into higher-yielding debt that are weighing on the yen. Funds based in Japan purchased a net ¥3.31 trillion ($22bn) of Treasuries in September while they sold debt in most other sovereign markets tracked by the Ministry of Finance…”

November 10 – Wall Street Journal (Ben Foldy): “A boom in private credit has been moving a huge portion of corporate borrowing away from public view, taking it from the world of banks and the bond market and into the more opaque realm of private funds. Now analysts are piecing together clues showing how risky those loans might be. A recent analysis by S&P Global Ratings used the firm’s confidential credit assessments for clients to offer a rare view of roughly 2,000 private corporate borrowers with more than $400 billion in debt between them. Without identifying the companies, the firm ran stress tests to see how they might fare in varying economic scenarios. The findings offer a glimpse into the private credit market, which grew in popularity after the financial crisis in 2008-09 and surged more recently after conventional lenders pulled back following this year’s banking crisis. Much of that private lending has gone to smaller, less-profitable companies that are already loaded with debt. With the market growing, the Securities and Exchange Commission recently approved new rules for private fund managers.”

November 8 – Bloomberg (Amelia Pollard and Steven Church): “WeWork Inc.’s first appearance in bankruptcy court… kicked off a months-long process to decide how creditors should divide the remains of a once high-flying company that can’t afford to repay more than $4 billion it borrowed. So far, court papers show that billions of dollars of the co-working firm’s debt will be converted into equity, while nearly all shareholders and owners of low-ranking bonds will be wiped out… Many of the company’s biggest creditors have already signed onto the proposal, but landlords who face cancellation of more than 100 leases have not.”

November 8 – Bloomberg (Tom Maloney): “WeWork Inc. never figured out how to make money. Adam Neumann sure did. The office-leasing business declared bankruptcy this week, two years after finally going public minus its infamous co-founder. It has $19 billion of liabilities and $15 billion of assets. Longtime investors, including Softbank Group Corp. and the Vision Fund, will add to the enormous losses they’ve already taken on the venture… But a part of Neumann might be thankful he was forced out in 2019 following the company’s disastrous first attempt at an initial public offering. While battering his reputation, the exit left him with plenty of liquidity, and he’s still worth $1.7 billion…”

November 5 – Financial Times (Harriet Clarfelt): “The US economy may be growing much faster than pessimists had predicted, but business is still brisk for bankruptcy lawyers. ‘Things have really accelerated,’ says Thomas Lauria, global head of restructuring at White & Case. His team is on track for record-breaking revenues this year… Such activity is a sign that a new era of high borrowing costs is starting to bite in corporate America, whose overall borrowings now total $13tn according to Federal Reserve data. Businesses that grew accustomed to cheap debt during more than a decade of ultra-low interest rates must now adjust to a world where financing costs more.”

November 7 – New York Times (Jack Ewing): “Normally a 50% increase in sales is considered very good. But when the number of electric vehicles sold in the United States grew that much during the third quarter from a year earlier, it was a disappointment. Carmakers and analysts had expected more. Instead of celebrating, auto executives worried that demand for electric vehicles was slackening, raising questions about their plans to invest tens of billions of dollars to develop new models and build factories. In recent weeks, General Motors, Ford Motor and Tesla cited slower sales and signs that the economy was weakening in announcing that they would delay that spending.”

November 4 – CNBC (Andrew Evers and Deirdre Bosa): “Self-driving cars have flooded San Francisco streets… In August, two of the leading autonomous vehicle companies, General Motors -owned Cruise and Alphabet’s Waymo, were granted permission to expand operations, allowing people to hail a driverless car the same way they order an Uber… But the launch has been plagued by problems. The cars have driven into firefighting scenes, caused construction delays, impeded ambulances and even meandered into active crime scenes. ‘There have been 75 plus incidents,’ said San Francisco fire chief Jeanine Nicholson. ‘It’s like playing Russian roulette. It’s impacting public safety and that’s what we need to fix.’”

Banking Crisis Watch:

November 6 – Reuters (Howard Schneider): “Banks tightened lending standards for U.S. businesses and households in the third quarter, but the pace of change appeared to ease, and demand for loans fell broadly in a sign of the impact higher interest rates are having on the economy, the Federal Reserve reported… The tightening of standards for business loans applied to firms of all sizes, the U.S. central bank said in its latest survey of senior bank lending officers, while consumers faced tighter credit for home and home equity loans, credit cards, and tougher terms on auto loans… While more than half of banks reported tightening business lending standards in the second quarter, just 35% said they cranked down further in the third quarter, with about 62% keeping standards the same. One bank reported easing standards slightly.”

November 8 – Financial Times (Stephen Gandel and Joshua Franklin): “Delinquent commercial real estate loans at US banks have hit their highest level in a decade, as higher interest rates, an uncertain economy and the rise of remote working pile pressure on building owners. The volume of past-due loans in which owners of properties rented to others have missed more than one payment jumped 30%, or $4bn, to $17.7bn in the three months to the end of September, according to… BankRegData. The figure had risen by $10bn in a year. Bank lending remains in historically good shape and even after the recent jump, just 1.5% of commercial property loans were past due.”

U.S./Russia/China/Europe Watch:

November 10 – CNN (Simone McCarthy): “Xi Jinping has a plan for how the world should work, and one year into his norm-shattering third term as Chinese leader, he’s escalating his push to challenge America’s global leadership — and put his vision front and center. That bid was in the spotlight like never before last month in Beijing, when Xi, flanked by Russian President Vladimir Putin, United Nations Secretary General Antonio Guterres, and some two dozen top dignitaries from around the world, hailed China as the only country capable of navigating the challenges of the 21st century. ‘Changes of the world, of our times, and of historical significance are unfolding like never before,’ Xi told his audience at the Belt and Road Forum. China, he said, would ‘make relentless efforts to achieve modernization for all countries” and work to build a “shared future for mankind.’ Xi’s vision — though cloaked in abstract language — encapsulates the Chinese Communist Party’s emerging push to reshape an international system it sees as unfairly stacked in favor of the United States and its allies.”

November 8 – Associated Press: “Russian President Vladimir Putin told a senior Chinese military official… that Moscow and Beijing should expand their cooperation on military satellites and other prospective defense technologies— a statement that signaled increasingly close defense links between the allies. Putin spoke in televised remarks at the start of his meeting with Gen. Zhang Youxia, who is China’s second-ranking military official and vice chairman of the Central Military Commission… ‘I mean space, including high-orbit assets, and new prospective types of weapons that will ensure strategic security of both Russia and the People’s Republic of China,’ Putin said...”

November 8 – Bloomberg (Jacob Gu): “China is ready to work with Russia to jointly safeguard their interests as well as global and regional prosperity and stability, China’s highest-ranking general, Zhang Youxia, told President Vladimir Putin in Moscow… Zhang said ‘the sound relationship between the two militaries serves as an important symbol of the high level and particularity of China-Russia relations,’ according to the state-run Xinhua News Agency.”

November 5 – Reuters (Guy Faulconbridge): “Russia’s new strategic nuclear submarine, the Imperator Alexander III, has successfully tested a Bulava intercontinental ballistic missile, the Russian defence ministry said… The missile, which the Federation of American Scientists says is designed to carry up to six nuclear warheads, was launched from an underwater position in the White Sea off Russia's northern coast and hit a target thousands of kilometres away on the Kamchatka peninsula in the Russian Far East, the defence ministry said.”

De-globalization and Iron Curtain Watch:

November 8 – Bloomberg: “The Chinese government issued a warning to Estonia after the Baltic nation said it would allow Taiwanese officials to open a non-diplomatic office to develop cultural and economic relations. China opposes any official exchange with Taiwan… ‘in any form,’ Wang Wenbin, a spokesman for the Foreign Ministry, said... The remarks came a day after Estonia’s Postimees newspaper reported that China’s ambassador warned she may leave the country if the office is opened.”

November 8 – Reuters (Ben Blanchard): “The Chinese government… told Britain to stop its efforts to ‘enhance’ ties with Taiwan after a high level meeting in London and the signing of a new trade agreement between the island and Britain. Taiwan and Britain… on Wednesday signed a new Enhanced Trade Partnership and British Trade Minister Nigel Huddleston hosted Taiwan Deputy Economy Minister Chen Chern-Chyi for talks in London.”

Inflation Watch:

November 6 – Financial Times (Martin Arnold): “Geopolitical tensions are driving more multinational companies to signal plans for moving production into countries that are politically closer to their final markets, according to a European Central Bank survey. The ECB found almost four times as many European multinationals said they would shift production to politically friendly countries — a phenomenon known as ‘friend-shoring’ — as have done so in the past five years. While 42% of the 65 companies polled by the ECB claimed they would increasingly produce more in politically friendly markets, a higher number — 60% — flagged that changes to their supply chains and production locations have pushed up prices over the past five years.”

November 8 – Reuters (David Shepardson and Joseph White): “United Auto Workers President Shawn Fain said… the union will ‘pull out all stops’ in working to organize non-union U.S. auto plants after winning new contracts with the Detroit Three automakers. Fain will join President Joe Biden on Thursday… to tout Chrysler-parent Stellantis decision to reopen a shuttered assembly plant there… Fain said the UAW is aggressively working on its organizing plans. ‘We're going to pull out all stops. We're going to leverage every avenue we can and we're going to find creative ways to get to workers,’ Fain said. ‘We're going to employ everything we can to support workers and give them what they need.’”

November 7 – Financial Times (Susannah Savage): “Beef prices in the US have climbed to record highs as droughts in the south and west fuel higher feed costs and force ranchers to cut the national cattle herd size to a 61-year low. Average prices of beef sold in US shops and supermarkets have risen to about $8 per pound, topping their previous high of $7.90 reached during the pandemic… Live cattle prices in Chicago are also close to a record, at $1.79 per pound, compared with $1.50 this time last year. But ranchers, who would normally thrive on record prices, are instead worried that the prices reflect a growing crisis: years of drought or low rainfall in prime cattle-raising land that is turning green pastures into dust fields.”

November 8 – Wall Street Journal (Alison Sider and Esther Fung): “The next recruiting hotspot for U.S. airlines in need of experienced pilots is FedEx and United Parcel Service. PSA Airlines, a regional carrier owned by American, is offering bonuses totaling $250,000 for UPS and FedEx pilots who can come work as captains and help fill a gap that has forced PSA to keep planes grounded and curtail service to some cities. FedEx is saying its pilots might want to consider the offer. UPS passed on the details to pilots who recently accepted a company buyout.”

Biden Administration Watch:

November 8 – Bloomberg (Serene Cheong): “Washington’s hawks are demanding that President Joe Biden’s administration tighten US sanctions on Iran as punishment for its support of Hamas, the militant group behind the attacks that triggered the current conflict with Israel. Tehran, they argue, has been exporting more oil over recent months than it has in years. But fresh measures and tougher enforcement will struggle to curtail the Islamic Republic’s key source of income — thanks to China’s appetite for discounted crude, and what traders, analysts and oil industry executives describe as expanded payment and transport networks that the US cannot reach.”

November 9 – Reuters (Soo-Hyang Choi and Ju-min Park): “U.S. Secretary of State Antony Blinken said… he shared South Korean concerns about growing military cooperation between North Korea and Russia, which he called a ‘two-way street’ involving arms flows and technical support. Blinken and South Korean Foreign Minister Park Jin also said they discussed a so-called extended deterrence strategy in countering threats from North Korea… ‘We have real concerns about any support for North Korea's ballistic missile programs, for its nuclear technology, for its space launch capacity,’ Blinken told a press conference in the South Korean capital. ‘We're working to ... identify, to expose and as necessary to counter these efforts.’”

November 9 – Wall Street Journal (Andrew Duehren): “As Treasury Secretary Janet Yellen meets Chinese Vice Premier He Lifeng this week, the two sides find themselves in an economic role reversal. The U.S. economy… bounded forward this year, notching 4.9% growth in the third quarter and defying forecasts of a recession. China, meanwhile, is mired in a property slump that has weighed down its entire economy, raising questions among economists about whether Beijing’s growth engine is permanently downshifting. The comparative U.S. strength and Chinese weakness is a change from previous rounds of diplomacy between the world’s two largest economies…”

November 7 – Bloomberg (Viktoria Dendrinou): “The US Treasury reiterated its call for greater transparency in how Beijing conducts its exchange-rate policy and said it was monitoring China alongside five other major trading partners over its currency practices. In its semiannual foreign-exchange report…, the Treasury Department refrained from designating any trading partner as a foreign-exchange manipulator. ‘China’s failure to publish foreign exchange intervention and broader lack of transparency around key features of its exchange rate mechanism make China an outlier,’ the Treasury said in its report.”

Federal Reserve Watch:

November 9 – Wall Street Journal (Nick Timiraos): “Fed Chair Jerome Powell indicated the central bank wouldn’t declare an end to its historic interest-rate increases until it had more evidence that inflation was cooling. Price and wage pressures have eased recently, leading more investors to think the Fed is done raising rates. Powell disappointed those investors in a speech Thursday by explaining why he thinks the Fed is more likely to tighten policy than ease it if any change is warranted. While Powell didn’t build a case for lifting rates now, he pointed to earlier inflation ‘head fakes,’ past episodes in which price pressures ebbed for a while before surprising Fed officials by picking up again. He said they would monitor economic conditions closely to avoid both the risk of having been ‘misled by a few good months of data,’ as well as the risk of having raised rates too high, Powell said.”

November 7 – Bloomberg (Catarina Saraiva): “Federal Reserve officials are still trying to assess whether a run-up in long-term Treasury yields will help cool the economy enough to curtail the need for more interest-rate increases. Several of the US central bank’s more hawkish policymakers, speaking Tuesday, signaled that the cumulative tightening of financial conditions since July… could have a dampening effect on the economy, though they want more time to see if it will last. ‘We’ve seen some welcome progress with respect to inflation, but inflation still remains too high,’ Dallas Fed President Lorie Logan said... ‘For me, the core question is whether financial conditions that we’re seeing today are sufficiently restrictive to return inflation to 2% in both a timely and sustainable way.’”

November 10 – Bloomberg (Catarina Saraiva): “Federal Reserve Bank of Dallas President Lorie Logan said the US central bank should consider ways to strengthen its liquidity infrastructure which, while robust, still can’t eliminate risks completely. ‘It remains incumbent on all players in the financial system — banks, other market participants, as well as central banks in our roles as both regulators and financial institutions — to appropriately manage liquidity risk,’ Logan said…”

November 7 – Reuters (Ann Saphir): “Federal Reserve Governor Michelle Bowman… repeated her view that the U.S. central bank will likely need to raise short-term interest rates again, though for now she is content to assess the data and what it implies for the economic outlook. ‘I remain willing to support raising the federal funds rate at a future meeting should the incoming data indicate that progress on inflation has stalled or is insufficient to bring inflation to 2% in a timely way,’ Bowman said…”

November 7 – Bloomberg (Steve Matthews): “Federal Reserve Governor Christopher Waller said the US labor market is cooling this year without there being a big spike in unemployment as the economy has returned to a better balance between the supply and demand for workers. ‘It’s slowing down,’ Waller said... ‘We’re looking at the labor market, we’re seeing it normalized’ and getting into ‘better balance between supply and demand.’”

November 9 – Bloomberg (Alexandra Harris): “The amount of money that investors are parking at a major Federal Reserve facility dropped below $1 trillion for the first time in more than two years. A total of 94 participants on Thursday put a combined $993 billion at the Fed’s overnight reverse repurchase agreement facility, used by banks, government sponsored enterprises and money-market mutual funds to earn interest. It marks a steep decline from a record $2.554 trillion stashed on Dec. 30 and is the smallest sum since August 2021.”

U.S. Bubble Watch:

November 8 – Financial Times (Editorial Board): “Joseph Schumpeter shocked many with his forthright views about the power of free markets. The early 20th century Austrian economist once told his students at Harvard University: ‘Gentlemen, a depression is for capitalism like a good, cold douche’. He was, of course, referring to the forces of creative destruction that drain away weak enterprises during a downturn — and the term for shower. Right now, while a depression is not on the cards, higher interest rates are straining economic activity and a wave of corporate insolvencies are expected. After a decade of rock-bottom rates a Schumpeterian cold shower may not be a bad thing. Corporate bankruptcies in America are on course to hit their highest level since 2010. Insolvencies have already reached a post-financial crisis high in England and Wales, and have surged in the eurozone too.”

November 9 – Reuters (Dan Burns): “The number of Americans filing new claims for unemployment benefits edged down last week… Initial claims for state unemployment benefits fell 3,000 to a seasonally adjusted 217,000 for the week ended Nov. 4 from an upwardly revised 220,000 in the prior week… Meanwhile, the rolls of those receiving benefits after an initial week of aid, a proxy for hiring, rose for a seventh straight week to 1.834 million during the week ending Oct. 28, the highest level since April…”

November 6 – Bloomberg (Sagarika Jaisinghani and Farah Elbahrawy): “Corporate America is delivering the bleakest sales reports in four years this earnings season, a sign that weakening consumer demand is limiting companies’ ability to raise prices further. With more than 80% of S&P 500 firms having reported, less than half have beaten revenue estimates for the third quarter — the lowest share since the same period in 2019, according to… Bloomberg Intelligence. The pace of sales growth globally has also moderated to ‘the lower end of their pre-pandemic ranges,’ Deutsche Bank Group AG strategists said.”

November 7 – Yahoo Finance (Gabriella Cruz-Martinez): “Credit card debt surged again during the third quarter and so did the number of people missing payments. Credit card balances rose by $48 billion in the third quarter to a record high of $1.08 trillion, according to… the Federal Reserve Bank of New York. The $154 billion year-over-year gain in debt was the largest such increase since the beginning of the series in 1999. At the same time, the 90-day delinquency rate measure for credit cardholders increased to 5.78%, up from 3.69% a year earlier.”

November 8 – Bloomberg (Augusta Saraiva): “The average 30-year mortgage rate plunged last week by the most in more than a year, helping generate the biggest advance in home purchase applications since early June. The contract rate on a 30-year fixed mortgage slid 25 bps to 7.61%, the lowest level since the end of September, according to the Mortgage Bankers Association.”

November 9 – Associated Press (Alex Veiga): “Homebuyers who can afford to bypass the highest mortgage rates in two decades are increasingly forgoing financing and paying all cash. Homes purchased entirely with cash…, accounted for 34.1% of all sales in September. That’s up from 29.5% a year earlier and the highest share in nearly a decade, according to a Redfin analysis of home sales in 40 of the nation’s most populous metropolitan areas.”

Fixed Income Watch:

November 10 – Financial Times (Steve Johnson): “Investors pulled record sums from corporate bond exchange traded funds and pumped money into lower-risk government equivalents last month as benchmark lending rates soared to 16-year highs. Corporate bond ETFs leaked a net $9.4bn in October, according to figures from asset manager BlackRock, exceeding the previous record of $9.2bn in June last year, when strong US inflation data prompted fears of aggressive rate rises. In contrast, government bond ETFs sucked in $30.4bn…”

November 8 – Reuters (Matt Tracy): “Rising borrowing costs made a slight dent in U.S. companies' ability to make interest payments on their debt in the third quarter despite a boost in earnings, according to BofA Global Research. High-grade corporate borrowers' average interest coverage ratio - how many times over a company's income covers their interest payments - fell to 10.71x last quarter from 11.24x in the second quarter… Coverage ratios hit their lowest since the first quarter of 2021, when companies in many sectors struggled with pandemic-related supply cost increases and weak demand.”

China Watch:

November 5 – Reuters (Martin Quin Pollard and Wang Shuyan): “China will accelerate the issuance and use of government bonds, state-run news agency Xinhua reported… citing… new finance minister Lan Foan. The finance ministry will steadily promote the resolution of local government debt risk and increase efforts to better leverage the role of special bonds to boost the economy, Xinhua cited Foan as saying. ‘The Ministry of Finance will continue to implement a proactive fiscal policy, focus on improving efficiency, and better play the effectiveness of fiscal policy,’ said Lan, who also noted the ‘complex domestic and international situation’.”

November 8 – Bloomberg: “China will provide emergency funding to heavily indebted local governments as needed, central bank Governor Pan Gongsheng said — comments that underscore the importance authorities place on the problem. ‘When it’s necessary, the People’s Bank of China will provide emergency liquidity support to regions with a relatively heavy debt burden,’ Pan said…”

November 7 – Wall Street Journal (Jason Douglas): “China’s exports fell for the sixth straight month… The figures add to signs the Chinese economy is still facing difficulties despite a recent pickup in growth. Though officials have expanded stimulus in recent weeks, reflected in a rise in imports, economists say that Beijing will need to do more in the final months of the year to prevent another slowdown as a drawn-out property slump squeezes investment and consumer spending. Chinese exports fell 6.4% in October compared with a year earlier, to $275 billion…, a steeper decline than the 6.2% fall recorded in September.”

November 8 – Reuters (Liangping Gao and Ryan Woo): “China’s consumer prices swung lower in October, as key gauges of domestic demand pointed to weakness not seen since the pandemic, while factory-gate deflation deepened… The consumer price index (CPI) dropped 0.2% in October from a year earlier and slipped 0.1% from September… The headline figure was dragged by a further slump in pork prices, down 30.1%, speeding up from a 22% slide in September, amid an oversupply of pigs and weak demand.”

November 7 – Wall Street Journal (Cao Li and Rebecca Feng): “China’s housing slump is shaking the foundation of another giant property developer—and the government is trying to prevent the problems from spiraling out of control. China Vanke, one of the oldest and largest real-estate companies in the country, is the latest Chinese developer to fall victim to a market selloff that has made investors worry about its liquidity… On Monday, Shenzhen Metro Group, a state-owned enterprise that owns about 30% of Vanke, said it intends to provide full support to the developer. Vanke said its controlling shareholder stands ready to buy its bonds in the open market and could spend the equivalent of $1.4 billion purchasing some of the developer’s Shenzhen projects to help its liquidity.”

November 8 – Reuters: “Chinese authorities have asked Ping An Insurance Group to take a controlling stake in embattled Country Garden, the nation's biggest private property developer, four people familiar with the plan said. China's State Council, which is headed by Premier Li Qiang, has instructed the local government of Guangdong province, where both companies are based, to help arrange a rescue of Country Garden by Ping An… A spokesperson for Ping An said the company had not been approached by the government and denied the information reported by Reuters.”

November 8 – Bloomberg: “China’s prolonged housing slump means the real-estate sector is driving less growth and contributing to the economic slowdown, according to new research… Housing-related demand was an estimated 19.4% of final demand in the first nine months of this year, according to… Bloomberg Economics. That’s down from a recent peak of 24.2% in 2018, and it’s likely to continue dropping, they forecast. ‘Shrinking real estate activity will hurt growth in the short term,’ wrote Bloomberg Economists Chang Shu and Eric Zhu…”

November 8 – Wall Street Journal (Charley Grant): “China has long been a source of stock-market optimism. Now it is turning into a reason for worry. Investors started the year by pouring money into China-focused funds, a bet that the end of Covid-19 restrictions would unleash supercharged spending in the world’s second-largest economy. Instead, a stubborn lack of growth and escalating political tensions with the U.S. are fostering poor returns and uncertainty about the future. For investors in some heavyweight U.S. stocks—including Apple and Nvidia—the country suddenly doesn’t look as promising. ‘Reopening has been disappointing for everyone,’ said Rob Haworth, senior investment strategy director at U.S. Bank Wealth Management. ‘There wasn’t much pent-up demand in anything besides domestic travel.’”

November 8 – Bloomberg: “China is struggling in its attempt to lure foreigners back as data shows more direct investment flowing out of the country than coming in, suggesting companies may be diversifying their supply chains to reduce risks. Direct investment liabilities in the country’s balance of payments have been slowing in the last two years. After hitting a near-peak value of more than $101 billion in the first quarter of 2022, the gauge has weakened nearly every quarter since. It fell $11.8 billion in the July-to-September period, marking the first contraction since records started in 1998.”

November 5 – Bloomberg (Laura Liu and Yimin Liu): “The list of Chinese distressed bonds is getting longer by the day as the nation’s property market meltdown topples developers. Media coverage of the credit turmoil is rising back to levels seen in late 2021 following Country Garden Holdings Co.’s missed debt payment on Oct. 20. Chinese onshore and offshore bonds trading at distressed levels reached $60 billion, with the real estate sector taking up more than 80%.”

November 6 – Reuters (Rachel Savage and Clare Baldwin): “Chinese financial institutions lent $1.34 trillion to developing countries from 2000 to 2021, U.S. researchers at AidData said in a report that showed the world's biggest bilateral lender switching from infrastructure to rescue lending. While lending commitments peaked at almost $136 billion in 2016, China still committed to almost $80 billion of loans and grants in 2021…, which captures almost 21,000 projects in 165 low and middle income countries as probably the most comprehensive dataset of its type. Overseas finance has won Beijing allies across the developing world, while drawing criticism from the West and in some recipient countries, including Sri Lanka and Zambia, that infrastructure projects it funded saddled them with debt they were unable to repay.”

November 7 – Bloomberg (Rebecca Choong Wilkins and Shawn Donnan): “China is overhauling the way it lends to developing nations, a strategy that may help their largest official creditor maintain a narrowing lead over the US and its Group of Seven allies. Beijing has begun moving away from the big bilateral deals it was eager to strike a decade ago — when it first launched its flagship Belt and Road Initiative that mainly lends to infrastructure projects — in favor of collaborative lending that reduces its exposure to financial risk, according to a new report published by AidData at William and Mary…”

November 6 – Wall Street Journal (Brian Spegele): “During the Cultural Revolution, a teenage Xi Jinping was sent down to the countryside, where he spent years in the late 1960s and early ’70s toiling on farms and reading books in a cave. Half a century later, China’s leader wants more young people to follow his lead. With youth unemployment recently hitting record levels—and deepening concern in Beijing about the hollowing out of rural China—Xi is calling on students and college graduates to embrace hardship and consider giving up city life for the countryside. Officials have rolled out a number of programs to lure young people to rural areas, where they are tasked with promoting the quality of local crops, painting walls and extolling the Communist Party’s leadership to farmers.”

November 9 – Wall Street Journal (Chun Han Wong): “The list of business executives and political figures who have gone missing in China keeps growing. Top executives at a video-streaming platform and a pharmaceutical company were the latest to disappear, as an intensifying clampdown by Beijing on alleged corruption and malfeasance shakes business confidence in China, among local and foreign firms alike.”

Central Banker Watch:

November 6 – Reuters (Wayne Cole): “Australia’s central bank raised interest rates to a 12-year high…, ending four months of steady policy, but left it open on whether even more tightening would be needed to bring inflation to heel… TheReserve Bank of Australia (RBA) raised its cash rate by 25 bps to 4.35%, saying recent data suggested there was a risk inflation would remain higher for longer. ‘Whether further tightening of monetary policy is required to ensure that inflation returns to target in a reasonable timeframe will depend upon the data and the evolving assessment of risks,’ RBA Governor Michele Bullock said…”

November 8 – Financial Times (Sam Fleming, Mary McDougall, Martin Arnold and Colby Smith): “Top European central bankers have said interest rates will remain high, despite market bets that weaker growth will force rate-setters to cut borrowing costs. Andrew Bailey, Bank of England governor, said… it was premature to discuss rate cuts — even though Huw Pill, the BoE’s chief economist, said this week that markets were reasonable to expect a reduction in mid-2024. ‘It’s really too early to be talking about cutting rates,’ Bailey said... ‘The market will of course reach a view — it has to reach a view on the future path of interest rates. I totally understand that. But we are very clear we are not talking about that.’”

Japan Watch:

November 5 – Bloomberg (Toru Fujioka): “Bank of Japan Governor Kazuo Ueda signaled it’s unlikely policymakers will have the data needed to declare by year-end that it’s time to put an end to negative interest rates, as he continues to monitor whether a wage-inflation cycle will materialize. ‘It’s impossible to say the chances are zero, in truth,’ that authorities might be able to discern within the year that the BOJ’s 2% inflation target has been met, Ueda told reporters… ‘But, as I just said, there are less than two months’ left in 2023, he said, implying the likelihood of such an outcome is quite low.”

November 8 – Reuters (Leika Kihara): “Some Bank of Japan policymakers last month called for the need to start phasing out massive stimulus and lay the groundwork for a future exit from ultra-low interest rates, a summary of opinions at their October meeting showed… The discussions highlight how the BOJ is looking to exit its decade-long accommodative regime… BOJ Governor Kazuo Ueda told parliament… that companies were becoming more active than before in raising prices and wages, signalling his conviction that Japan was making progress towards hitting the bank's 2% inflation target.”

November 6 – Reuters (Satoshi Sugiyama): “Japan's real wages slipped in September for an 18th month, while consumer spending extended a months-long decline, with rising prices squeezing households' purchasing power, and likely to add to pressure from labour groups for higher wage increases. Financial markets worldwide pay close attention to the wage trends in the world's third-largest economy. The Bank of Japan regards sustainable pay increases as one of the prerequisites for unwinding its ultra-loose monetary stimulus.”

EM Watch:

November 6 – Financial Times (Sam Fleming and Mary McDougall): “Many smaller emerging markets are confronting a ‘silent debt crisis’ as they struggle with the impact of high US interest rates on their already-fragile finances, the World Bank has warned. After a sharp sell-off last year triggered by a rapid rise in global interest rates and a strong dollar, foreign currency emerging market debt has struggled to recover as investors bet that borrowing costs will have to stay higher for longer. That has left the proportion of emerging and developing countries whose borrowing costs are more than 10 percentage points above those of the US at 23%. That compares with less than 5% in 2019…”

November 6 – Bloomberg (Zijia Song and Kevin Simauchi): “Emerging-market borrowers crowded into the bond market Monday in the busiest day for sales of such debt this year, as a range of issuers jumped at the opportunity to lock in lower yields after a rally in benchmark US Treasuries. Governments from Costa Rica and Uruguay to Turkey and Bulgaria, and corporations including Colombia’s power company Grupo Energía Bogotá, Korea National Oil and Abu Dhabi Islamic Bank, were among at least 10 issuers that tapped the bond market, taking advantage of revived risk appetite…”

Levered Speculation Watch:

November 5 – Financial Times (Costas Mourselas and Harriet Agnew): “Ken Griffin, the founder and chief executive of $62bn US hedge fund Citadel, has warned regulators that they should focus their attention on banks rather than his industry if they want to reduce risks in the financial system stemming from leveraged bets on US government debt. Global regulators have warned about growing risks emerging from the so-called Treasury basis trade… But Griffin said they should focus on the risk management of banks that enable the trade by lending to hedge funds, rather than try to increase regulation of the hedge funds themselves. The US Securities and Exchange Commission… has proposed a new regime for the Treasury market that would treat hedge funds like the broker-dealer arms of banks. ‘The SEC is searching for a problem… If regulators are really worried about the size of the basis trade, they can ask banks to conduct stress tests to see if they have enough collateral from their counterparties.’”

November 6 – Bloomberg (Cathy Chan and Bei Hu): “Fragile markets, shadow lenders, international tensions and too many wars — global bankers gathering in Hong Kong were meant to discuss how they’re adapting to the financial world’s ‘complexity’ and ended up dwelling on the potential for big blowups instead. ‘My biggest fear is there’s one more geopolitical escalation and there’s a market event,’ Deutsche Bank AG Chief Executive Officer Christian Sewing said at the Global Financial Leaders’ Investment Summit in Hong Kong… The mood on stage was dour as banking and investing chiefs traded observations and fears… Bridgewater Associates co-Chief Investment Officer Bob Prince warned that markets are ‘under-discounting’ how long interest-rate tightening in the US and Europe will last in the fight against inflation before an equilibrium is reached. Meanwhile, Citadel founder Ken Griffin said world leaders are already risking reigniting runaway prices.”

November 6 – Bloomberg (Nell Mackenzie): “Hedge funds last week ‘aggressively’ bought U.S. stocks at the fastest pace in two years, said a Goldman Sachs note… Global funds bought up U.S. equities in the week up to Nov. 3, in the largest five-day buying spree since December 2021, according to Goldman's prime brokerage trading desk in a note dated on Friday.”

November 8 – Bloomberg (Alice Atkins): “For more than a decade, running a foreign exchange fund meant having to defend lackluster returns and worrying about the imminent threat of closure. Thanks to the biggest divergence in Group-of-10 central bank rates since 2008, dedicated foreign exchange funds are heading for an annual return of around 7%, more than double the average over the last two decades, according to… BarclayHedge… Year-to-date, investors selling the yen to fund purchases of dollars reaped over 20%. Traders that went short Swedish krona to buy sterling made around 9%. Overall, Nomura’s Group of 10 FX Carry index, which shows returns adjusted for volatility, is on course for its best year since 2016.”

Social, Political, Environmental, Cybersecurity Instability Watch:

November 6 – Bloomberg (Alexandre Tanzi): “More than three-and-a-half years after Covid struck, the US still has around 2 million more retirees than predicted, in one of the most striking and enduring changes to the nation’s labor force. The so-called Great Retirement induced by Covid-19 is evident in the divergence between the actual number of retirees and that predicted by a Federal Reserve economic model. While down from a 2.8 million gap late last year, it remains elevated today and has even risen from 1.7 million in June. ‘While the gap seemed to be closing earlier in the year, it seems to have widened slightly since then,’ said Miguel Faria-e-Castro, economic policy adviser at the Federal Reserve Bank of St. Louis. ‘As of September, we estimate about 1.98 million excess retirees.’”

November 8 – Financial Times (Kenza Bryan, Steven Bernard and Justine Williams): “Earth is nearly certain to experience its hottest year after October smashed temperature records, with the UN secretary-general blaming governments for ‘runaway climate carelessness’ by failing to cut fossil fuel production. The Copernicus European Earth observation agency said temperatures in October were 0.85C above the long-term average for the month. This monthly anomaly was more than double the September rise, and the highest on record. The ‘exceptional’ October followed four months of global temperature records being ‘obliterated’, said Samantha Burgess, deputy director of Copernicus… ‘Laid out so starkly, the 2023 numbers on air temperatures, sea temperatures, sea ice and the rest look like something out of a Hollywood movie,’ said David Reay, a climate scientist at Edinburgh university. ‘If our current global efforts to tackle climate change were a film it would be called Hot Mess.’”

November 9 – Bloomberg (Olivia Rudgard): “The past 12 months have been the hottest on record, as 99% of the world’s population experienced above-average warmth, according to new analysis… ‘Records will continue to fall next year, especially as the growing El Niño begins to take hold, exposing billions to unusual heat,’ said Andrew Pershing, vice president for science at Climate Central. ‘While climate impacts are most acute in developing countries near the equator, seeing climate-fueled streaks of extreme heat in the US, India, Japan and Europe underscores that no one is safe from climate change.’”

November 7 – Bloomberg (Michael Hirtzer and Dominic Carey): “American wheat shipments dropped to the lowest ever, hampered by a shrinking Mississippi River and competition from ample global grain supplies. Drought has dried up the Mississippi, where roughly two-thirds of US grain exports historically have been shipped on barges to the US Gulf… That’s limited demand for US grain and contributed to the country losing its status as the shipper of choice.”

November 8 – Reuters (Peter Hobson): “Australia recorded the driest October in more than 20 years due to an El Nino weather pattern which has seen hot, dry conditions hit crop yields in one of the world's largest wheat exporters, the national weather bureau said… In its regular drought report, the Bureau of Meteorology said last month was Australia's driest October since 2002, with rainfall 65% below the 1961–1990 average.”

Geopolitical Watch:

November 9 – Financial Times (Christian Davies): “At a recent banquet to celebrate the achievements of his country’s navy, a relaxed Kim Jong Un sat with his wife and young daughter as they were serenaded by a choir of North Korean sailors. The east Asian country’s millennial dictator had every reason to feel content… Steering North Korea through a period of extreme isolation to counter Covid-19 while defying tough international sanctions, he has emerged into the warm embrace of Moscow and Beijing amid intensifying geopolitical tensions in the region. ‘He survived [Donald] Trump, he survived the sanctions and he survived the pandemic,’ says Andrei Lankov, professor of history at Kookmin University in Seoul. ‘Who in his position would not feel triumphant?’”